## 1. Kyrgyz Republic: Selected Economic Indicators, 2004–10

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### Key Issues and Program Context
- During 2005–2009 the Kyrgyz Republic experienced several high-impact internal and external shocks.
- Authorities maintained a relatively stable macroeconomic environment under Fund-supported programs until domestic turmoil in early 2010 adversely affected performance.
- Progress in promoting structural reforms and in improving the transparency of government operations has been disappointing; lack of progress in transparency may jeopardize macroeconomic stability over the medium term.
- A new three-year Fund program could be helpful during reconstruction, but structural conditionality needs careful design.
- Review coverage:
  - Assesses performance under the March 2005 PRGF (expired May 2008) and the December 2008 ESF (expired June 2010).
  - The Rapid Credit Facility (RCF) approved September 15, 2010 is not covered.
  - Fund policy requires an EPA prior to a request for a new arrangement.
- 2004 EPA recommendations summarized:
  - Fiscal policy must deliver on its revenue targets.
  - Debt reduction must remain a main objective; new borrowing needs to be highly concessional.
  - Structural reforms—particularly in the financial and energy sectors—must be reinvigorated.
  - Close the 'implementation gap' between measures and implementation; strong implementation requires a strong and legitimate state and a professional civil service.
  - To garner public support for reforms, tangible reduction in corruption and increased transparency of government operations are important.

### Macroeconomic Trends and Crisis Response (2005–10)
- Growth and shocks:
  - Domestic political upheaval in 2005 produced negative economic growth in 2005; political stability improved thereafter until 2010.
  - Growth decelerated in 2009 due to the global crisis; recovery began in Q1 2010 but political turmoil in April and inter-ethnic flare-up in June 2010 are expected to result in a contraction in economic activity for the full year.
  - On average, growth performance over 2005–09 was slightly below regional peers.
- Fiscal policy:
  - Increasing government revenue supported balanced budgets by 2007–08 and sharp decline in public debt, creating a buffer for countercyclical fiscal policies in 2009 and especially 2010.
  - Reconstruction effort expected to lead to a budget deficit of 6 percent of GDP in 2010.
- Inflation and prices:
  - International food and fuel price increases in 2007–08 led to a sharp spike in prices, with inflation more pronounced than in regional peers.
- Crisis response measures:
  - Authorities reduced the VAT rate and increased social and capital spending in response to the global crisis; these policies were largely financed by timely grant and loan support from Russia.
  - Exchange rate flexibility and looser monetary policy helped absorb external shock effects.

### IMF Program Design, Conditionality, and Outcomes
- 2005–08 PRGF:
  - Objectives: preserve macroeconomic stability via fiscal consolidation; raise growth prospects and reduce poverty; pursue structural reforms focused on financial and energy sectors.
  - Original access: 10 percent of quota; augmented to 20 percent of quota at last review in 2008. The amount was fully drawn.
  - Conditionality: Eleven quantitative performance criteria (including zero ceilings on central government budget arrears, Social Fund pension arrears, Social Fund arrears to the Medical Insurance Fund, new nonconcessional external debt, and new external payment arrears). Structural benchmarks and an indicative target on electricity sector quasi-fiscal deficits used to support reforms; ownership proved inadequate and several structural benchmarks were missed.
  - Macroeconomic outcomes: Six reviews completed on time; no waivers for quantitative performance criteria required. Elevated GDP growth in 2007 and 2008 supported sharp falls in external debt ratios and improvements in poverty indicators. Fiscal performance: higher government revenue, balanced budgets, sharp declines in public debt.
  - Structural reform challenges: political instability impeded reforms; civil service reform attempts had limited success; attempts to reduce QFDs in the energy sector had limited success.
  - HIPC decision: authorities decided in early 2007 not to request further relief under HIPC and MDRI initiatives.
- 2008–10 ESF:
  - Objective: provide assistance to address a temporary balance of payments need whose primary source is a sudden and exogenous shock.
  - Identified shocks in the 2008 ESF request: (i) the rise in international food and fuel prices; (2) the global economic crisis, and in particular its impact on Russia and Kazakhstan; (3) banking sector difficulties in Kazakhstan; (4) a shortfall in hydropower capacity, owing to insufficient water levels; (5) an earthquake in a remote border region.
  - Conditionality: more streamlined than the PRGF. Quantitative instruments included PCs on net international reserves and net domestic assets of the NBKR; PC on the cumulative overall deficit of the general government; indicative targets for reserve money and tax collection.
  - Program access: 75 percent of quota, of which half was drawn.
  - Implementation and performance: only one review completed out of envisaged three. Of the three ESF goals (‘reduce inflation, sustain growth, protect the poor’), only the first was achieved. All end-December 2008 and end-June 2009 PCs met; two December 2009 PCs were missed (NBKR net domestic assets and general government cumulative overall deficit), requiring waivers. Structural benchmarks were missed in governance and transparency of government operations. Efforts to restore program momentum were overtaken by events in 2010.

### Monetary Policy and Financial Sector Vulnerabilities
- Monetary developments (2004–07):
  - Large foreign exchange receipts created pressures; NBKR conducted largely unsterilized interventions, expanding reserve money and breaching indicative reserve money targets.
  - By end-2006: year-on-year growth in reserve money reached 48 percent; year-on-year growth in broad money reached 52 percent.
  - Monetary overhang contributed to inflation vulnerability when international food prices rose mid-2007.
  - NBKR responses in late 2007: allowed the som to appreciate by almost 9 percent in three months from September 2007; increased sales of central bank bills and introduced 91- and 182-day bills; yields on government securities increased on average by about 3 percentage points from June to December 2007.
- Financial sector performance and vulnerabilities:
  - The banking system weathered the global financial crisis well initially, but the 2010 domestic upheaval exposed systemic weaknesses.
  - Asia Universal Bank (AUB): largest bank with nearly 50 percent of system deposits prior to the crisis; AUB’s overall deposit share increased from 19 percent at end-2007 to almost 50 percent at end-March 2010.
  - AUB faced asset losses due to fraud and rapid deterioration in loan quality caused by connected and insider lending and exposure to the south; after significant non-resident deposit outflow, AUB was put under conservatorship and subsequently nationalized.
  - Resolution: authorities followed a good-bad bank model and made some progress, but the resolution process remained incomplete; systemic risks appeared to have dissipated by the time of reporting.
  - Box 7 recommendations (selected): reinforce central bank independence, strengthen supervisory capacity, improve legal and regulatory framework, raise corporate governance, strengthen bank resolution framework, clarify government responsibilities. Supervisory weaknesses: temporary administration was introduced in 7 out of 22 commercial banks (with more than 60 percent of the system deposits) after April 2010. Court rulings frequently overriding central bank decisions undermined financial stability. Deposit insurance creation in the second half of 2008 likely contributed to avoiding major bank runs.

### Energy Sector: Quasi-Fiscal Deficits and Reform Attempts
- Energy sector constraints:
  - Shortages and volatility in energy supplies reduce output and lead to electricity rationing.
  - Electricity tariffs among the lowest in the region; inefficient use results.
  - Widespread electricity theft and inadequate metering lead to low bill collections.
  - Below-cost-recovery tariffs and poor collection produce high quasi-fiscal deficits (QFDs), financed partially by direct subsidies and loans from the central government and partially reflected in underinvestment and poor maintenance.
- PRGF and later reform efforts:
  - Indicative targets on QFD were met in 2005–2006 but missed in 2007.
  - Commitment to raise electricity tariffs during the PRGF was not met; electricity tariffs for households were raised by 13 percent in 2008 but remained far below cost recovery.
  - Independent electricity regulatory agency was downgraded to a department in a reorganized Ministry of Energy, weakening governance.
  - Comprehensive reforms initiated in 2009 failed due to improper implementation and poor public communication.
  - A two-round increase in electricity tariffs planned for 2010 would have resulted in a cumulative increase in household electricity tariffs of no less than 171 percent; the first round triggered public discontent, led to government fall, and the interim government reversed the increases.
  - Privatization of two distribution companies in 2009 was annulled by the interim government in 2010 due to shortcomings in the tender process.
- Recommendation: bring QFD under control, implement a targeted safety net for higher prices, embed tariff increases in an overall sector reform strategy focused on improving transparency and governance; close cooperation with key donors is important given the Fund’s limited expertise in energy issues.

### Governance, Poverty, and Program Risks
- Governance issues:
  - Governance problems remained widespread during 2005–08 PRGF and 2008–10 ESF.
  - Corruption Perception Index rating deteriorated significantly after March 2005.
  - Key governance weaknesses: public sector management and institutions; energy and mining sectors.
  - Donor funds transparency: lack of transparency in management of donor funds created additional risks during the ESF period.
  - Kyrgyz Republic Development Fund (KRDF): ESF emphasized integrating KRDF operations into the general government framework and improving KRDF reporting and auditing; conditionality helped safeguard KRDF assets; following the April 2010 events the new authorities decided to liquidate the KRDF.
  - Prior structural benchmarks and anti-corruption proposals were often not observed or were delayed.
- Poverty trends:
  - Periods covered: 2000–2004 and program period 2005–08 (PRGF) with later 2008–10 (ESF).
  - Per capita GDP: "an over 50 percent increase in per capita GDP" during 2000 to 2004.
  - Poverty rates: declined from "52 percent to 46 percent" over 2000 to 2004; fell further "to 35 percent by end-2007" during the 2005–08 PRGF program period.
  - Main drivers of decline through end-2007: "an increase in private consumption" and "high inflows of workers’ remittances".
  - During 2008–10 ESF period: "earlier gains in poverty reduction may have been partially reversed" due to shocks causing lower growth, reduced employment opportunities, weakened remittances, and lower real incomes.
- Program risk assessment:
  - Lack of progress in economic governance may jeopardize macroeconomic stability and poses reputational risk for the Fund.
  - Governance concerns delayed and contributed to noncompletion of ESF reviews.
  - Preconditions for sustainable recovery: a solution of security issues, especially reconciliation in the south, is a precondition for sustainable economic development.
  - Exogenous shocks will likely continue to affect program performance; solid performance under the RCF would provide some comfort but no guarantees.

### Proposed Role and Design Features for Future IMF Involvement
- Proposed role:
  - A new three-year ECF could help finance reconstruction, catalyze donor support, and address structural issues.
  - Such a program should ensure fiscal consolidation over the medium term, rebuild macroeconomic policy buffers, and avoid renewed government and external debt buildup.
- Structural conditionality design:
  - Must be carefully designed, based on a homegrown development strategy, take into account implementation capacity, and be coordinated with donors (in particular the World Bank).
  - Should be meaningful without being perceived as intrusive to preserve ownership.
  - Financial sector reforms: maintain a level playing field, strengthen central bank independence and supervisory capacity, reduce the role of courts in financial stability matters, raise transparency and accountability, strengthen bank resolution framework.
  - Energy sector reforms: bring QFD under control, implement a targeted safety net for higher prices, embed tariff increases in an overall sector reform strategy focused on improving transparency and governance; close cooperation with key donors is important.
- Preconditions and risk management:
  - Security and reconciliation in the south as preconditions.
  - Weak governance remains a key concern and requires careful program design and monitoring.

### Key Figures and Selected Indicators (2004–10, as reported)
- Program access: 75 percent of quota, of which half was drawn.
- Tax revenue projection: projected drop from 23 percent of GDP to 19 percent (projection that did not materialize).
- Tax to GDP: 23.0 percent in 2008; 22.7 percent in 2009.
- AUB deposit share: 19 percent at end-2007; almost 50 percent at end-March 2010.
- Table 1 selected items:
  - Real GDP (growth in percent): 2004: 7.0; 2005: -0.2; 2006: 3.1; 2007: 8.5; 2008: 7.6; 2009: 2.9; 2010: -1.4.
  - Non-gold real GDP (growth in percent): 2004: 7.6; 2005: 1.4; 2006: 5.7; 2007: 9.0; 2008: 5.4; 2009: 3.4; 2010: -2.1.
  - GDP per capita (in U.S. dollars): 2004: 435; 2005: 478; 2006: 546; 2007: 727; 2008: 972; 2009: 880; 2010: 863.
  - Consumer prices (12-month percent change, eop): 2004: 2.8; 2005: 4.9; 2006: 5.1; 2007: 20.1; 2008: 20.1; 2009: 0.0; 2010: 18.9.
  - Investment (percent of GDP): 2004: 20.8; 2005: 21.6; 2006: 22.5; 2007: 21.0; 2008: 20.3; 2009: 22.9; 2010: 24.7.
  - Savings (percent of GDP): 2004: 25.8; 2005: 24.4; 2006: 19.5; 2007: 20.9; 2008: 12.3; 2009: 24.9; 2010: 21.2.
  - Total revenue and grants (percent of GDP): 2004: 23.3; 2005: 24.7; 2006: 26.4; 2007: 30.3; 2008: 29.9; 2009: 32.3; 2010: 31.7.
  - Tax revenue (percent of GDP): 2004: 18.3; 2005: 20.0; 2006: 21.4; 2007: 22.6; 2008: 23.0; 2009: 22.2; 2010: 23.2.
  - Total expenditure (including net lending) (percent of GDP): 2004: 27.7; 2005: 28.1; 2006: 28.9; 2007: 31.0; 2008: 29.3; 2009: 36.1; 2010: 38.1.
  - Overall fiscal balance (percent of GDP): 2004: -4.4; 2005: -3.6; 2006: -2.1; 2007: -0.3; 2008: 0.0; 2009: -3.6; 2010: -6.5.
  - Primary balance (percent of GDP): 2004: -3.1; 2005: -2.0; 2006: -1.2; 2007: 0.3; 2008: 0.8; 2009: -2.8; 2010: -5.6.
  - Total public debt (percent of GDP): 2004: 92.9; 2005: 85.9; 2006: 72.5; 2007: 56.8; 2008: 48.5; 2009: 57.9; 2010: 65.1.
  - Gross international reserves (million USD): 2004: 544; 2005: 608; 2006: 814; 2007: 1,194; 2008: 1,222; 2009: 1,584; 2010: 1,700.
  - Export of goods and services (million USD): 2004: 1,024; 2005: 1,053; 2006: 1,485; 2007: 2,244; 2008: 3,037; 2009: 2,821; 2010: 2,794.
  - Export growth (percent change): 2005: 24.2; 2006: 2.9; 2007: 40.9; 2008: 51.1; 2009: 35.4; 2010: -7.1; 2011 (reported as) -0.9.
  - Import of goods and services (million USD): 2004: 1,127; 2005: 1,397; 2006: 2,253; 2007: 3,218; 2008: 4,747; 2009: 3,680; 2010: 4,015.
  - Import growth (percent change): 2005: 27.7; 2006: 23.9; 2007: 61.3; 2008: 42.8; 2009: 47.5; 2010: -22.5; 2011: 9.1.
  - External public debt outstanding (percent of GDP): 2004: 88.5; 2005: 78.0; 2006: 69.8; 2007: 54.6; 2008: 41.2; 2009: 52.8; 2010: 59.5.
  - Exchange rate (soms per U.S. dollar, average): 2004: 42.64; 2005: 41.04; 2006: 40.13; 2007: 37.3; 2008: 36.6; 2009: 43.0; 2010: 46.0.

*Source: IMF staff report excerpt — "1. Kyrgyz Republic: Selected Economic Indicators, 2004–10" (excerpts provided).*

### 1. Kyrgyz Republic: Selected Economic Indicators, 2004–10 ................................................19

### 1. Kyrgyz Republic: Selected Economic Indicators, 2004–10

### Key Issues
- During 2005–2009 the Kyrgyz Republic experienced several high-impact internal and external shocks.
- Authorities maintained a relatively stable macroeconomic environment under Fund-supported programs until domestic turmoil in early 2010 adversely affected performance.
- Progress in promoting structural reforms and in improving the transparency of government operations has been disappointing; lack of progress in transparency may jeopardize macroeconomic stability over the medium term.
- A new three-year Fund program could be helpful during reconstruction, but structural conditionality needs careful design.

### Introduction and Program Context
- This report reviews performance under Fund-supported programs from early 2005 to mid-2010: the March 2005 Poverty Reduction and Growth Facility (PRGF, expired May 2008) and the December 2008 Exogenous Shock Facility (ESF, expired June 2010).
- The Rapid Credit Facility (RCF) approved September 15, 2010 is not covered by this assessment.
- Fund policy requires an EPA prior to a request for a new arrangement.
- The 2004 EPA recommendations provided the starting point (Box 1 key recommendations):
  - Fiscal policy must deliver on its revenue targets.
  - Debt reduction must remain a main objective; new borrowing needs to be highly concessional.
  - Structural reforms—particularly in the financial and energy sectors—must be reinvigorated.
  - Close the 'implementation gap' between measures and implementation; strong implementation requires a strong and legitimate state and a professional civil service.
  - To garner public support for reforms, tangible reduction in corruption and increased transparency of government operations are important.

### Selected Macroeconomic Trends, 2005–10
- Domestic political upheaval in 2005 ('Tulip Revolution') produced negative economic growth in 2005; political stability improved thereafter until 2010.
- Growth decelerated in 2009 due to the global crisis; recovery began in Q1 2010 but political turmoil in April and inter-ethnic flare-up in June 2010 are expected to result in a contraction in economic activity for the full year.
- On average, growth performance over 2005–09 was slightly below regional peers.
- Fiscal policy:
  - Increasing government revenue supported balanced budgets by 2007–08 and sharp decline in public debt.
  - This created a buffer for countercyclical fiscal policies in 2009 and especially 2010, with the reconstruction effort expected to lead to a budget deficit of 6 percent of GDP in 2010.
- Inflation and prices:
  - International food and fuel price increases in 2007–08 led to a sharp spike in prices, with inflation more pronounced than in regional peers.
- Crisis response:
  - The global crisis affected the Kyrgyz Republic mainly through trade and remittance channels (key partners Russia and Kazakhstan in recession).
  - Authorities reduced the value-added tax (VAT) rate and increased social and capital spending in response; these policies were largely financed by timely grant and loan support from Russia.
  - Exchange rate flexibility and looser monetary policy helped absorb external shock effects.

### IMF Programs, 2005–10: Objectives and Achievements — The 2005–08 PRGF
- The 2005–08 PRGF drew on the 2004 EPA recommendations and aimed to preserve macroeconomic stability via fiscal consolidation; raise growth prospects and reduce poverty; and pursue structural reforms focused on financial and energy sectors.
- Program access and amounts:
  - Original access under the 2005 program request was 10 percent of quota; augmented to 20 percent of quota at the time of the last review in 2008 due to the deteriorating external environment. The amount was fully drawn.
- Conditionality and implementation:
  - Eleven quantitative performance criteria (including zero ceilings on central government budget arrears, Social Fund pension arrears, Social Fund arrears to the Medical Insurance Fund, new nonconcessional external debt, and new external payment arrears).
  - Structural benchmarks and an indicative target on electricity sector quasi-fiscal deficits were used to support reforms; ownership by authorities proved inadequate and several structural benchmarks were missed.
- Macroeconomic outcomes:
  - Six reviews completed on time; no waivers for quantitative performance criteria required.
  - Elevated GDP growth in 2007 and 2008 supported sharp falls in external debt ratios and improvements in poverty indicators.
  - Fiscal performance: higher government revenue, balanced budgets, sharp declines in public debt.
  - Monetary policy: appears to have been slightly behind the curve in 2007–08; greater exchange rate flexibility could have helped during international food and fuel price increases.
- Structural reform challenges:
  - Political instability during much of the PRGF period impeded structural reforms; civil service reform attempts had limited success.
  - Attempts to reduce quasi-fiscal deficits (QFDs) in the energy sector had limited success.
- HIPC decision:
  - Authorities decided in early 2007 not to request further relief under HIPC and MDRI initiatives; domestic political considerations played a major role.
  - Foregoing HIPC was a missed opportunity that would have released fiscal space and lowered debt-service burdens.

### Monetary Policy in 2007–08 (Box 2)
- Large foreign exchange receipts during 2004–07 created pressures on the domestic foreign exchange market; the National Bank of the Kyrgyz Republic (NBKR) conducted largely unsterilized interventions to avoid excessive appreciation, resulting in a large expansion of reserve money and frequent breaches of indicative reserve money targets.
- By end-2006:
  - Year-on-year growth in reserve money reached 48 percent.
  - Year-on-year growth in broad money reached 52 percent.
- The monetary overhang contributed to inflation vulnerability when the international food price shock hit mid-2007.
- NBKR responses in late 2007:
  - Allowed the som to appreciate against the U.S. dollar by almost 9 percent in three months from September 2007.
  - Increased sales of central bank bills and introduced 91- and 182-day bills, creating maturity overlap with treasury bills.
  - Yields on government securities increased on average by about 3 percentage points from June to December 2007.
- Staff had cautioned starting early 2007 that high international food prices could rekindle inflation and called for tighter monetary stance.

### Energy Sector Reform (Box 3)
- The energy sector is a major constraint on growth: shortages and volatility in energy supplies (especially in winter) reduce output and lead to electricity rationing.
- Policy failures:
  - Electricity tariffs among the lowest in the region; inefficient use results.
  - Widespread electricity theft and inadequate metering lead to low bill collections.
  - Below-cost-recovery tariffs and poor collection produce high quasi-fiscal deficits (QFDs), financed partially by direct subsidies and loans from the central government and partially reflected in underinvestment and poor maintenance.
- PRGF measures to reduce QFDs:
  - Indicative targets on QFD were met in 2005–2006 but missed in 2007.
  - A commitment to raise electricity tariffs during the PRGF was not met.
  - An action plan to reduce QFD lacked detail.
  - Electricity tariffs for households were raised by 13 percent in 2008 but remained far below cost recovery.
  - An independent electricity regulatory agency was downgraded to a department in a reorganized Ministry of Energy, weakening governance.
- Reform attempts from 2009:
  - Comprehensive reforms initiated in 2009 failed due to improper implementation and poor public communication.
  - A two-round increase in electricity tariffs planned for 2010 would have resulted in a cumulative increase in household electricity tariffs of no less than 171 percent; the first round triggered public discontent, led to government fall, and the interim government reversed the increases.
  - Privatization of two distribution companies in 2009 was annulled by the interim government in 2010 due to shortcomings in the tender process.
- Budgetary and tariff indicators cited (no rounding or aggregation beyond source text).

### HIPC Initiative and External Debt (Box 4)
- February 2006–February 2007: World Bank and IMF staff worked with authorities on HIPC.
- As of early 2006 the Kyrgyz Republic met eligibility criteria for the enhanced HIPC Initiative: IDA-only and PRGF-eligible, a track record of reforms, and NPV of debt-to-revenue ratio exceeding the HIPC threshold.
- Staff estimated assistance needs:
  - Estimated total assistance of US$397 million in end-2004 NPV terms (equivalent to 18 percent of GDP) would have been needed to bring debt-to-revenue ratio to HIPC threshold.
  - Annual debt service savings over the medium term would have lowered the debt service-to-revenue ratio by 6½ percentage points.
- Decision and consequences:
  - In February 2007 the government decided to forego HIPC debt relief, driven by limited public support and political sensitivities over transparency triggers in mining and energy.
  - Subsequently, growth and fiscal discipline reduced debt indicators below HIPC thresholds, though the Kyrgyz Republic remains potentially eligible if debt ratios increase again.
- Debt outlook:
  - Debt Sustainability Analysis (DSA) update concludes the Kyrgyz Republic faces a moderate risk of debt distress (Country Report No. 10/336).
  - External debt began increasing again due to substantial fiscal expansion in 2009 and 2010 and planned borrowing related to energy investments.
  - Recommendation: medium-term fiscal consolidation, prudent debt management, and structural reforms are needed to avoid a new cycle of debt build-up.

*Source: IMF staff report excerpt — "1. Kyrgyz Republic: Selected Economic Indicators, 2004–10" (excerpts provided).*

### 12.      Unlike the 2005 PRGF, the 2008–10 ESF was not explicitly linked to the 2004 EPA.

### _030911a - 12.      Unlike the 2005 PRGF, the 2008–10 ESF was not explicitly linked to the 2004 EPA.

### ESF objective and identified shocks
- Objective: provide assistance to address a temporary balance of payments need whose primary source is a sudden and exogenous shock.
- In the Kyrgyz republic’s 2008 request for an ESF, five shocks were identified:
  - (i) the rise in international food and fuel prices;
  - (2) the global economic crisis, and in particular its impact on Russia and Kazakhstan;
  - (3) banking sector difficulties in Kazakhstan;
  - (4) a shortfall in hydropower capacity, owing to insufficient water levels;
  - (5) an earthquake in a remote border region.

### Conditionality and program design
- Conditionality under the 2008 ESF was more streamlined than under the 2005 PRGF.
- Quantitative program instruments included:
  - performance criteria (PCs) on net international reserves and net domestic assets of the NBKR;
  - PC on the cumulative overall deficit of the general government;
  - indicative targets for reserve money and tax collection.
- Program access: 75 percent of quota, of which half was drawn.
- Rationale for ESF choice: less ambitious structural reform agenda consistent with the ESF’s focus on sudden shocks; allowed Fund staff to increase focus on macroeconomic policy and facilitated program ownership.

### Program implementation and performance
- Review completion: only one review completed out of the envisaged three.
- Achievement of program goals (three main goals: ‘reduce inflation, sustain growth, protect the poor’):
  - only the first was achieved.
- Performance on PCs:
  - all end-December 2008 and end-June 2009 PCs met;
  - two December 2009 PCs were missed (NBKR net domestic assets and general government cumulative overall deficit), requiring waivers for subsequent reviews.
- Structural benchmarks were missed in governance and transparency of government operations (see Box 5).
- Efforts to restore program momentum were overtaken by events in 2010.

### Macroeconomic policy outcomes under the ESF
- Macroeconomic policy was generally appropriate, similar to the 2005 PRGF.
- Revenue performance:
  - With a new tax code introduced in January 2009, staff projected a drop in tax revenue from 23 percent of GDP to 19 percent — this drop did not materialize.
  - Tax to GDP declined from 23.0 percent in 2008 to 22.7 percent in 2009.
  - Improvements in tax administration and increased gold-related tax receipts largely compensated for lower VAT revenues.
- Gold exports:
  - the value of gold exports in 2009 was more than double that in 2007.

### Financial sector performance and vulnerabilities
- The Kyrgyz banking system weathered the global financial crisis well initially, but the 2010 domestic upheaval exposed systemic weaknesses.
- Asia Universal Bank (AUB):
  - was the largest bank, with nearly 50 percent of system deposits prior to the crisis;
  - faced asset losses due to fraud and rapid deterioration in loan quality caused by connected and insider lending and exposure to the south;
  - after significant non-resident deposit outflow, AUB was first put under conservatorship and subsequently nationalized;
  - AUB’s overall deposit share increased from 19 percent at end-2007 to almost 50 percent at end-March 2010.
- Resolution progress:
  - authorities followed a good-bad bank model and made some progress, but the resolution process remained incomplete.
  - systemic risks appeared to have dissipated by the time of reporting.
- Box 7 findings and recommendations (selected):
  - supervisory weaknesses: temporary administration was introduced in 7 out of 22 commercial banks (with more than 60 percent of the system deposits) after April 2010;
  - central bank capacity and independence need strengthening;
  - court rulings frequently overriding central bank decisions undermined financial stability;
  - deposit insurance creation in the second half of 2008 likely contributed to avoiding major bank runs;
  - recommended reforms: reinforce central bank independence, strengthen supervisory capacity, improve legal and regulatory framework, raise corporate governance, strengthen bank resolution framework, clarify government responsibilities.

### Governance issues and program risk assessment
- Governance problems remained widespread during 2005–08 PRGF and 2008–10 ESF.
- Corruption Perception Index rating deteriorated significantly after March 2005.
- Key governance weaknesses: public sector management and institutions; energy and mining sectors.
- Donor funds transparency: lack of transparency in management of donor funds created additional risks during the ESF period.
- Kyrgyz Republic Development Fund (KRDF):
  - ESF emphasized integrating KRDF operations into the general government framework and improving KRDF reporting and auditing;
  - conditionality helped safeguard KRDF assets;
  - following the April 2010 events the new authorities decided to liquidate the KRDF.
- Box 5 conclusion: prior structural benchmarks and proposals to tackle corruption were often not observed or were delayed; improvements in the ‘Doing Business’ ranking (Kyrgyz Republic ranked 44 in the Doing Business 2011 report) had not yet produced a major impact on economic activity.

### Conclusions and options for future IMF involvement
- Overall macroeconomic assessment (2005–10): generally satisfactory macroeconomic performance.
  - Prudent fiscal policy in the good years provided space for countercyclical policies in 2009 and 2010.
  - Revenue targets were met, often with wide margins.
  - External debt was reduced significantly despite forgone HIPC/MDRI debt relief.
  - Monetary policy appropriate though the central bank could have tightened earlier in 2007.
- Shortcomings:
  - progress in structural reforms and transparency of government operations was disappointing;
  - energy and financial sector weaknesses had large macroeconomic implications and stemmed from broader economic governance problems;
  - neither the structural benchmarks approach (2005–08 PRGF) nor the hands-off approach (2008–10 ESF) produced much impact on governance.
- Risks:
  - lack of progress in economic governance may jeopardize macroeconomic stability and poses reputational risk for the Fund;
  - governance concerns delayed and contributed to noncompletion of ESF reviews.
- Proposed role of a new Fund program:
  - a new three-year ECF could help finance reconstruction, catalyze donor support, and address structural issues;
  - such a program should ensure fiscal consolidation over the medium term, rebuild macroeconomic policy buffers, and avoid renewed government and external debt buildup.
- Structural conditionality design for a future ECF:
  - must be carefully designed, based on a homegrown development strategy, take into account implementation capacity, and be coordinated with donors (in particular the World Bank);
  - should be meaningful without being perceived as intrusive to preserve ownership;
  - financial sector reforms: maintain a level playing field, strengthen central bank independence and supervisory capacity, reduce the role of courts in financial stability matters, raise transparency and accountability, strengthen bank resolution framework;
  - energy sector reforms: bring QFD under control, implement a targeted safety net for higher prices, embed tariff increases in an overall sector reform strategy focused on improving transparency and governance; close cooperation with key donors is important given the Fund’s limited expertise in energy issues.
- Preconditions and risk management:
  - a solution of security issues, especially reconciliation in the south, is a precondition for sustainable economic development;
  - weak governance remains a key concern and will require careful program design and monitoring;
  - exogenous shocks will likely continue to affect program performance; solid performance under the RCF would provide some comfort but no guarantees.

### Key figures and selected indicators (as reported)
- Program access: 75 percent of quota, of which half was drawn.
- Tax revenue: projected drop from 23 percent of GDP to 19 percent (projection that did not materialize).
- Tax to GDP: 23.0 percent in 2008; 22.7 percent in 2009.
- AUB deposit share: 19 percent at end-2007; almost 50 percent at end-March 2010.
- Table 1 selected items (2004–10, as reported in the source):
  - Real GDP (growth in percent): 2004: 7.0; 2005: -0.2; 2006: 3.1; 2007: 8.5; 2008: 7.6; 2009: 2.9; 2010: -1.4.
  - Non-gold real GDP (growth in percent): 2004: 7.6; 2005: 1.4; 2006: 5.7; 2007: 9.0; 2008: 5.4; 2009: 3.4; 2010: -2.1.
  - GDP per capita (in U.S. dollars): 2004: 435; 2005: 478; 2006: 546; 2007: 727; 2008: 972; 2009: 880; 2010: 863.
  - Consumer prices (12-month percent change, eop): 2004: 2.8; 2005: 4.9; 2006: 5.1; 2007: 20.1; 2008: 20.1; 2009: 0.0; 2010: 18.9.
  - Investment (percent of GDP): 2004: 20.8; 2005: 21.6; 2006: 22.5; 2007: 21.0; 2008: 20.3; 2009: 22.9; 2010: 24.7.
  - Savings (percent of GDP): 2004: 25.8; 2005: 24.4; 2006: 19.5; 2007: 20.9; 2008: 12.3; 2009: 24.9; 2010: 21.2.
  - Total revenue and grants (percent of GDP): 2004: 23.3; 2005: 24.7; 2006: 26.4; 2007: 30.3; 2008: 29.9; 2009: 32.3; 2010: 31.7.
  - Tax revenue (percent of GDP): 2004: 18.3; 2005: 20.0; 2006: 21.4; 2007: 22.6; 2008: 23.0; 2009: 22.2; 2010: 23.2.
  - Total expenditure (including net lending) (percent of GDP): 2004: 27.7; 2005: 28.1; 2006: 28.9; 2007: 31.0; 2008: 29.3; 2009: 36.1; 2010: 38.1.
  - Overall fiscal balance (percent of GDP): 2004: -4.4; 2005: -3.6; 2006: -2.1; 2007: -0.3; 2008: 0.0; 2009: -3.6; 2010: -6.5.
  - Primary balance (percent of GDP): 2004: -3.1; 2005: -2.0; 2006: -1.2; 2007: 0.3; 2008: 0.8; 2009: -2.8; 2010: -5.6.
  - Total public debt (percent of GDP): 2004: 92.9; 2005: 85.9; 2006: 72.5; 2007: 56.8; 2008: 48.5; 2009: 57.9; 2010: 65.1.
  - Gross international reserves (million USD): 2004: 544; 2005: 608; 2006: 814; 2007: 1,194; 2008: 1,222; 2009: 1,584; 2010: 1,700.
  - Export of goods and services (million USD): 2004: 1,024; 2005: 1,053; 2006: 1,485; 2007: 2,244; 2008: 3,037; 2009: 2,821; 2010: 2,794.
  - Export growth (percent change): 2005: 24.2; 2006: 2.9; 2007: 40.9; 2008: 51.1; 2009: 35.4; 2010: -7.1; 2011 (reported as) -0.9.
  - Import of goods and services (million USD): 2004: 1,127; 2005: 1,397; 2006: 2,253; 2007: 3,218; 2008: 4,747; 2009: 3,680; 2010: 4,015.
  - Import growth (percent change): 2005: 27.7; 2006: 23.9; 2007: 61.3; 2008: 42.8; 2009: 47.5; 2010: -22.5; 2011: 9.1.
  - External public debt outstanding (percent of GDP): 2004: 88.5; 2005: 78.0; 2006: 69.8; 2007: 54.6; 2008: 41.2; 2009: 52.8; 2010: 59.5.
  - Exchange rate (soms per U.S. dollar, average): 2004: 42.64; 2005: 41.04; 2006: 40.13; 2007: 37.3; 2008: 36.6; 2009: 43.0; 2010: 46.0.

*Source: IMF staff report content as provided in the supplied document.*

### Annex 1. Kyrgyz Republic: Observance of Program Conditionality, 2005–2008

### Annex 1. Kyrgyz Republic: Observance of Program Conditionality, 2005–2008

### Compliance framework and key note
- The annex presents a compliance matrix using the following symbols:  observed,  not observed, — observed with delay.
- A PRGF indicative target on contracting or guaranteeing by the state government or NBKR of new concessional debts was included and "These targets have all been met."
- The annex enumerates quantitative performance criteria, indicative targets, and structural benchmarks across the PRGF and ESF reviews, with compliance indicated by the symbols above.

### Poverty trends (Annex 2)
- Period covered: 2000 to 2004 and program period 2005–08 (PRGF) with a later period 2008–10 (ESF).
- Per capita GDP: "an over 50 percent increase in per capita GDP" during 2000 to 2004.
- Poverty rates:
  - Declined from "52 percent to 46 percent" over 2000 to 2004.
  - Fell further "to 35 percent by end-2007" during the 2005–08 PRGF program period.
- Main drivers of the decline in poverty through end-2007:
  - "An increase in private consumption"
  - "High inflows of workers’ remittances"
- Program design and fiscal priorities under the 2005 PRGF:
  - Based on the National Poverty Reduction Strategy (NPRS) and the Country Development Strategy (CDS).
  - Additional budgetary resources allocated to poverty-reducing spending: "investments in health and education" and "increased pension benefits to the poorest segment."
  - Emphasis on a campaign against corruption, especially in the tax and customs administrations, aimed at increasing revenue and creating room for increased social spending.
  - Fiscal reforms targeted improving public expenditure management, strengthening "budget credibility and transparency," and enhancing tracking, monitoring, and reporting of poverty-related spending.
- Outcomes and later developments:
  - Over the life of the PRGF program: "macroeconomic conditions improved, growth was robust, social spending increased, and poverty rates were reduced."
  - Constraints that limited further inclusive gains: "inequality remained high, owing to a lack of labor-intensive growth and continued weak governance."
  - During the 2008–10 ESF period: "earlier gains in poverty reduction may have been partially reversed" due to shocks that caused "lower economic growth, a reduction in employment opportunities, weakened inflows of workers’ remittances, and lower real incomes."

### Authorities’ views (Annex 3)
- Consultation: "A draft EPA report was discussed in Bishkek on January 31 and February 1, 2011" with the First Deputy Prime Minister, Mr. Babanov; the Acting Governor of the NBKR, Mrs. Jeenbaeva; and the Minister of Economic Regulation, Mr. Tashbaev.
- Summary of authorities’ reactions:
  - "The authorities broadly agreed with the conclusions of the EPA report, and considered that it provided a balanced assessment of the Kyrgyz Republic’s performance under the 2005-08 PRGF and the 2008–10 ESF."
  - Specific comments provided by the authorities:
    - On maturity overlap: they "considered that the maturity overlap between NBKR notes and treasury bills discussed in Box 2 of the report did not result in competition between the two instruments, as total sales of NBKR notes were small."
    - On 2007 inflation: they "considered that consumer price inflation in 2007 was driven by a sharp increase in food prices, and hence essentially non-monetary in nature," and that "Combating this inflation with monetary policy alone would have been costly and ineffective."
    - On the August 2009 mission and ESF review: they noted "that if the August 2009 mission had been able to complete the second review under the ESF, performance criteria for end-December 2009 would have been modified. Two of these criteria were eventually missed, as noted in paragraph 13 of the report."

*Annex 1. Kyrgyz Republic: Observance of Program Conditionality, 2005–2008 (content unit).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2011/_030911a.pdf_